In early April, I was delighted to join Sun Degang and Nasser Saidi in a discussion about GCC-China Trade and Investment hosted by the Robert Mogielnicki of the Arab Gulf States Institute in Washington. The trigger for the discussion was the progress in negotiating the long-delayed GCC-China FTA, which has been under discussion for decades, but our discussion was much broader, tackling many elements of trade and investment between the region and China, the broader trade landscape and what additional investment and capital market developments could materialize as part of an agreement or without it. Watch the discussion below or read on for some of my thoughts.
Signing an FTA is a part of the regional strategy but The trade and tariff elements of the FTA are arguably less important than the investment, co-investment and technology transfer. Financial agreements 5 year economic or other plans.
There is partly a chicken and egg problem. Most of GCC exports are of goods (minimally processed commodities) that have limited tariffs. Developing other industries would require subsidies which might make compliance with an FTA more difficult. China does have an important strategic partnership with GCC, but investment, technology transfer and joint ventures may be more important than trade per se. That said, the GCC has more to trade with China than in 2004 but its worth noting that many countries have struggled to make in roads into China via their FTAs.
Overall MFN tariffs are not very high, but some areas, including petrochemical are obstacles (and indeed have been obstacles for GCC FTAs with other jurisdictions (EU, UK).
There is mixed evidence that FTAs drive investment, but it would definitely be an important symbol and could create new incentives for coinvestment and potentially to link to other free trade areas (RCEP) or spur on some capital markets developments. However the latter could continue irrespective of an FTA.
The lack of FTA hasn’t stopped investment. Note the significant bilateral investment from Saudi Arabia into China, including into China’s downstream energy sector. A companion investment agreement might facilitate other investments in a variety of sectors, but it does depend on the economic returns.
Given the balancing act between the US and China and the increased role the UAE and Saudi Arabia in particular are trying to play as swing states looking to maximize their geopolitical and economic interests, an agreement would be symbolic and would play into the interests China has of showing itself as a supporter of trade at a time when the US is reluctant to sign trade agreements, or is offering what seems to be rather narrow agreements based on particular sectors, or broad standards based ones.
The China-GCC discussions are coming when there are two competing trends in the global economy both responses to the lack of progress at a full multilateral level. These are increased bilateral or minilateral deals including some that are very narrowly focused on a key sector such as EVs, Semiconductors etc. These agreements reflect efforts to solve various other issues some self-inflicted.
At the same time, especially in Asia, there is greater focus on joining even larger trade groupings CPTPP and RCEP, in effort to reduce tariff and non-tariff barriers. The US IPEF focus less on tariff reduction and more on setting new standards. The GCC-China agreement might be more important if it also opens up more opportunities with other Asian economies. However, given the state of local developments and industry, it might continue to be GCC consumers that benefit most, while GCC investors including state-owned ones seek more co-investment agreements.
There’s plenty to watch in the coming months, including whether there will be more capital market dynamics, co-investment with Chinese entities and whether the recent round of capital raising extends beyond traditional sectors. We also talked about the Petro-yuan, which has captured the market by storm as part of the recent trend of concern about the role of the US dollar. While there is clearly an interest in some aspects of less reliance on the USD, its important to remember that a) the RMB is managed against the dollar, as are all GCC currencies, most of which are pegged, so the macro trends of the US/Fed can’t fully be avoided. b) both regions are surplus economies and thus need to either invest in other currencies lest they appreciate too much. Chinese decisions on how to resolve its RMB internationalization vs capital marke